By Tiernan Ray

With another bummer hitting the market this afternoon — in this case, the announcement by Capital One (COF) this afternoon that it’s shuttering the residential mortgage origination business within its wholesale mortgage banking unit — I thought I’d chat with an astute market observer who watches stocks while also reflecting on the larger picture of where economies, rates, and consumer spending are trending. Zachary Karabell is chief economist with Fred Alger Management in New York, whose $12 billion in assets under management ranges from Chinese tech firms to shares of Dell (DELL).

On today’s positive tape, Zack observes dryly, “Perhaps people became convinced the Fed was going to cut rates any minute” — a prospect he doesn’t poo-poo, so much as dismiss as a rather futile exercise in speculation. “I am jaded and tired of Fed watching,” says Karabell. “It’s too much like Sovietologists in the 1980s, parsing every adjective, like ‘very.’”

How bad does the liquidity mess get from here? “While we have been really just monitoring things daily, that notwithstanding, you know, there was not, like, huddled meetings and complete re-evaluation if anything a lot of this was expected, and we thought maybe it was going to come earlier in the summer.”

So what risks are still out there? “There’s the risk of psychology and panic. And there’s the risk that fewer wise decisions have been made by a great number of people on Wall Street than people currently suspect. That’s something to keep an eye on, but you also want to keep it in perspective. The notion that the liquidity crunch has an immediate global economic impact has to be put into question. If your home has dropped in value [...] you’re upset because you’ve lost some net worth. But no one has ever been able to show a real link between the wealth effect and spending. The real link is between incomes and spending. We have low inflation statistically in the U.S. People will say if you factor in inflation for high-frequency consumer items it’s a little higher than the nominal rate. But it’s still relatively low from a global perspective. And the fundamental picture for companies hasn’t really changed in the last couple weeks. I’ve been saying for a long time that correlation between the macro-environment in the U.S. and the earnings of companies we follow isn’t not as strong as it once was. Even if there’s downward pressure on GDP growth in the U.S., that doesn’t necessarily tell you a lot about companies’ earnings.”

Is the economy, overall, strong enough to withstand the credit crunch? “The reason that question evokes such a strong reaction, when people say it’s good or it’s terrible, is because there is no one economy they are talking about. [Cisco Systems's (CSCO) Chief Executive] John Chambers’s economy is incredibly strong; the subprime subdivision 30 miles to the east of Silicon Valley isn’t so strong. For businesses that are connected to global supply chain dynamics, which is just about any business, this is as good as it’s been, and it shows no signs of derailing.”

But the private equity buying that was sucking supply of tech stocks out of the market is going away, leaving supply less scarce, which has to have an effect on stocks, no? “We’ve said for a while now that private equity was good for stocks, but it was more noticeable than it was vast in terms of numbers. Equally important has been share buybacks by companies. China just announced mainland Chinese investors could buy Hong Kong shares. Could that lead to them buying Nasdaq shares at some point? Yes, it could. I don’t know when, but the point is there are buyers of equities outside the U.S. And remember that alongside private equity buying, share buybacks by companies have been a very important factor and remain so. We always thought the private equity phenomenon was an indicator, not a cause of the fundamental strength of the companies; Those trends still look in place.”

Time to dig into tech stocks, in particular? “It may be true that at a fundamental level you see this as a series of buying opportunities, but you have to be judicious about how you go about it. Tech’s been one of the better performing sectors this year. The old rule of thumb that when energy does well, tech does badly, has broken down. There’s global demand for both. And high-energy prices were supposed to cut into margins at tech producers and low-end consumer spending on electronics, but that hasn’t been the case. Tech’s gotten less cyclical, much more disciplined on the part of management, in areas like semis. Cisco, in particular, is one that’s gotten more disciplined about its own capital expenditures and operating costs, and that’s continued to innovate.”

How do you play tech when people are skittish but they’re also buying stock today? “You don’t really play tech, you play sub-sectors. We’ve seen some of our best opportunities in graphics-, communications- and entertainment-related semiconductor makers in the last six months, and those themes are still viable. Cisco’s been very attractive and very compelling, Microsoft (MSFT), less so. Apple (AAPL), even with the recent dive, has been an impressive name that’s generating new markets with its products. Hewlett-Packard (HPQ) continued to have an impressive turn-around.”

Are you concerned about the improper accounting disclosed by Dell last Friday? Is the recovery at Dell in jeopardy? “Past-tense doesn’t invalidate our thesis some of [the accounting irregularities that are now being restated] was when Michael Dell had been moving away from [control of] the company. We haven’t been dumping our stock because of it.”

So what’s the biggest concern out there now about a safe landing to this credit crunch? “You’re still dealing with a low global interest rate environment, and people are now widely expecting an interest rate cut to happen. The only major threat now would be if many central banks started tightening. We’ve been saying for years that we’re at in a low interest rate environment. The central banks are not known for extreme behavior in recent years; Since Greenspan, the Fed has not erred in the direction of choking off liquidity.”

What about the implosion of a major bank? “If a major financial institution imploded and you did the autopsy and you realized that risk controls and capital controls had gone out the window because management got enthralled with its own money making abilities, I don’t know that you would conclude there was a systemic breakdown imminent. You should never underestimate the ability of even a large institution to go off the rails, but you wouldn’t want to extrapolate too much from it before you took a look at why it happened.”

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.